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2005/08/14

Taxes start to hurt the Blue Bloods

WHEN Congress comes back from its summer recess, one of the first things Senate Republicans will try to do, again, is kill the estate tax.

Perhaps no other tax has so many passionate, persevering and politically organized opponents as the estate tax, or "death tax," as they have branded it.

As Michael J. Graetz and Ian Shapiro of Yale recount in "Death by a Thousand Cuts" (Princeton University Press), their entertaining account of the repeal movement, opponents of the estate tax have already achieved a remarkable political feat by building broad public support for abolishing a tax that currently affects only 2 percent of all estates.

But repeal would be costly - more than $70 billion a year, once it was complete - and many of the populist arguments in favor of repeal are misleading. If estate or inheritance taxes were frozen at today's levels, they would have almost no impact on family farmers and most small-business owners.

And while opponents contend that the estate tax is a "double tax," many of the earnings that are subject to it were never taxed in the first place.

The tax opponents, many of whom began as political neophytes more than 20 years ago, lead a powerful coalition of small-business owners, farmers, trade associations and corporate lobbying groups like the American Council on Capital Formation.

Killing the estate tax is one of President Bush's top priorities, and the House of Representatives has already passed a repeal measure four different times. But Senate Republicans, despite attempts to cut a deal with conservative Democrats before the summer recess, have been stalled on the issue.

Unable to muster the 60 votes they need to overcome a Democratic filibuster, Senate leaders are now vowing to push for full repeal as soon as they come back in September.

Hoping to pressure Democrats from conservative farming states just before Congress adjourned, two business-backed advocacy groups spent about $500,000 on television ads last month in states including Montana, North Dakota, Arkansas and Louisiana.

The ads, produced by the American Family Business Institute and the Free Enterprise Fund - the first an advocacy group dedicated to abolishing the estate tax, the second an advocacy group aimed at a wider range of tax cuts - focused on images of soldiers fighting on D-Day in World War II.

"The I.R.S. hits this greatest generation with an unjust double tax, the death tax," the narrator intoned in an ad aimed at North Dakota. Viewers are urged to "tell Kent Conrad," the state's Democratic senator, to "change his vote."

But despite the populist rhetoric and oft-repeated horror stories about families being forced to sell their farms in order to pay estate taxes, the battle is over a very large amount of money held by a very small number of families. A report last month by the Congressional Budget Office found that in 2000 only 2 percent of all estates - about 52,000 - were subject to any estate tax. At that point, taxes were imposed only on estates worth $675,000 or more. The limit rose to $1.5 million in 2004, and if that limit had been in effect in 2000, only 13,771 estates - fewer than 1 percent - would have been subject to the tax. All but 740 of them would have had enough in liquid assets to cover estate tax liabilities, the office estimated.

At the moment, taxes are imposed only on estates worth more than $1.5 million. Under Mr. Bush's tax cut of 2001, the estate tax is set to shrink steadily over this decade and disappear in 2010. But the 2001 bill called for the estate tax to reappear in full force in 2011.

The nonpartisan Joint Committee on Taxation estimates that full repeal would cost $290 billion over the next 10 years, but that calculation understates the true cost because full repeal would not occur until 2011.

Once the estate tax was fully repealed, the Treasury would lose more than $70 billion a year in today's dollars. Over the first 10 years of full repeal, the cost would total more than $700 billion, plus interest. Assuming that the government is still running an annual deficit in 2011, which is more likely than not, the total 10-year cost would be close to $1 trillion.

A compromise being floated by Senator Jon Kyl, Republican of Arizona, could be almost as expensive. Indeed, because of a strange wrinkle, the compromise could end up being far more generous to many heirs than outright repeal.

Mr. Kyl's proposal called for excluding estate taxes on all property up to $3.5 million and taxing anything above that amount at 15 percent - the same rate now charged on capital gains. Under current law, estate tax rates range up to about 45 percent.

As a practical matter, Mr. Kyl's approach would eliminate the estate tax for more than 99 percent of all families and greatly reduce taxes for the few who owed anything at all. If the $3.5 million exclusion were in effect in 2000, the Congressional Budget Office estimated, only 3,676 estates - about 0.15 percent of all estates - would have had to pay any tax. But the proposed compromise also comes with an important twist that could make it more expensive than the $53 billion a year estimated by Congressional tax scorers.

The twist is that the proposal would retain a big tax break that is supposed to disappear along with the estate tax. That break is known as the "stepped-up basis," and it means that an heir does not owe any capital gains taxes on any increase in value of property during the life of the person who died. A mansion that appreciated to $10 million from $1 million, for example, would not be subject to any capital gains taxes on that profit if an heir sold it. For many families with estates worth less than $3.5 million, that could amount to a double tax break. A person could build up wealth for years, yet avoid paying taxes because the gains were all "unrealized." His children could then inherit the property, sell it and avoid both the capital gains and estate taxes.

The added cost of retaining a stepped-up basis may be only partially reflected in the official cost estimates of Mr. Kyl's proposal, because it is difficult to estimate when people will sell inherited property. But the American Family Business Institute has said that a very high percentage of heirs sell or restructure their holdings within five years.

That's why it is misleading for opponents of the estate tax to claim that it is a double tax on earnings that have already been taxed once.

In many cases, that's not true. "A lot of assets that passed through very large estates have never been taxed and never will be," said Mr. Graetz of Yale. "It's a very big issue."

For thousands of single-digit millionaires, that could be a very good deal indeed.

Investors Slowly back down for higher risk trades

AT last, investors seem to be awakening to the idea that not all mergers are in their best interests. Given that the current merger mania shows no sign of abating, this epiphany is a mighty good thing.

While most investors greet takeovers with open arms, the fact is that few can be sure that the deals are being struck at the best possible price. Given that the only assessment of a deal's fairness is given by investment banks that are paid when the deal is done, investors are right to wonder whether they could have benefited if their company's negotiators had been tougher.

Now, some investors are doing more than just wondering whether these deals are fair - they are concluding that they are not, and are voting against them. Last month, for example, almost 30 percent of the shareholders in Transkaryotic Therapies, a biotech company, voted against its proposed acquisition by Shire Pharmaceuticals, a British drug company. Only 52.6 percent of the eligible shares were voted in favor of the merger, an unusually small majority.

Investors objected to that acquisition because of its price. After the deal was struck in April, Transkaryotic reported promising data from an important drug trial. This drove up the company's stock, making the acquisition price seem unreasonably low.

And at least one large shareholder of the Providian Financial Corporation has said that he will oppose that company's acquisition by Washington Mutual of Seattle. In the deal, announced in June, WaMu, as it is known, has agreed to pay Providian holders about $6.4 billion, or approximately $19 a share.

The price is only 8 percent above the level at which Providian, the big credit-card concern, was trading when the deal was announced. That is far below the 28 percent premium that Bank of America said it would pay for MBNA, another credit-card issuer.

Shareholders will vote on the Providian merger on Aug. 31. David L. King, a portfolio manager at Putnam Investments, which holds 7.5 percent of Providian's shares, says the price agreed to by the company is far too low. "We have very strong and well-considered opinions about what this company is worth, and $19 is not the answer," said Mr. King, who oversees the Putnam New Value fund. "There are scores of banks domestically and overseas who could buy Providian at a higher price. Let's find out who might be interested rather than selling the company at a price that is inadequate."

Providian's business is turning around, Mr. King asserted. "If you look at the latest quarter," he said, "its default rates have come down to single digits, which is normal, and credit quality is clearly on an uptick." He reckoned that the company was set to earn roughly $2 a share this year. "It baffles me why we should sell out at a price that is less than 10 times that," he added.

MAYBE not so baffling. After all, the interests of executives in most mergers are not necessarily aligned with those of their company's shareholders. Executives of the companies being acquired hit the jackpot in these deals because their stock option grants, restricted shares and retirement plans turn into instant cash. If their companies remained independent, this largess would be accessible only over longer periods.

Consider what Joseph W. Saunders, Providian's chief executive, who joined the company in late 2001, stands to receive if the deal with WaMu goes through.

Let's begin with his options. In 2004, he received 350,000 options exercisable at $13.29 each; that's 16.5 percent of all the options granted by Providian last year. In 2003, he received 1.25 million options with a strike of $7.33; that grant was 16.7 percent of all the options dispensed that year. And in 2002, his first full year on the job, he received 1.1 million options priced at $7.155. That award was 13.7 percent of the total given out by the company during the year.

These are, by any measure, exceedingly generous grants. The median option grant made to chief executives at 409 large companies last year was 5.67 percent of the awards made companywide, according to Equilar, a compensation analysis firm. Mr. Saunders's grants average about three times the median chief executive's.

Isn't it nice that these grants - 1.1 million shares in Mr. Saunders's pocket at last count - can now be cashed in, without delay? All told, the top Providian executives can cash in 3.5 million options and restricted shares if the takeover goes through.

Mr. Saunders will also receive the usual merger payments equal to three times his Providian salary and bonus. And his new employment agreement with WaMu - he will become president and chief executive of its credit card division - entitles him to restricted shares in that company worth $2 million when the merger is completed. He will also get options equal to three times the amount of restricted shares he receives.

Given the increasingly enormous paydays that takeovers can represent for executives, it's a good thing that directors, who owe fiduciary duties to the shareholders they represent, are there to make sure that any deal produces the highest possible price to the owners.

Or are they? After all, when directors have received restricted shares and options for their board service, they stand to receive payouts, albeit smaller ones, in a takeover as well. If they say no to the deals, those payouts are no longer immediate.

Providian's outside directors receive annual retainers of $60,000 for their service. But if they choose to take their compensation in Providian stock, they can receive an additional award of restricted shares equal to 25 percent of the pay they take in stock. Half of the restricted shares can be cashed in after three years and the rest after six years. If the merger goes through, however, these shares can be cashed in at once.

And last year, Providian began adding stock awards worth $100,000 to the annual retainers it pays its directors. Outside directors received 6,582 stock options exercisable at $12 each and 4,166 restricted shares.

Providian's eight outside directors are James P. Holdcroft Jr., a private investor who hails from Wall Street; Ruth M. Owades, president of Owades Enterprises, a consumer marketing enterprise; Jane A. Truelove, a private investor who was a senior vice president at Fidelity Investments; Richard D. Field, a private investor and former executive at Bank of New York; F. Warren McFarlan, a Harvard Business School professor; John L. Douglas, a partner at Alston & Bird, a law firm that has provided services to Providian in the past; Robert J. Higgins, a private investor who was a director at Rhode Island's Department of Administration; and Francesca Ruiz de Luzuriaga, an independent business development consultant who had been an executive at Mattel Inc.

Alan Elias, a Providian spokesman, said that none of the company's outside directors would discuss the deliberations they made to conclude that the deal was fair. "We fully expect the deal to conclude in the beginning of the fourth quarter and we continue to believe that the proposed merger is fair and equitable," Mr. Elias said. He declined to comment further.

Gary Lutin, an investment banker at Lutin & Company in New York, who runs shareholder forums on corporate control matters, says the proposal to buy Providian is a transaction that cries out for an independent, third-party appraisal.

"The investment bankers have significant interests in fees that are purely contingent on the transaction as well as continuing relationships with managements," Mr. Lutin said. "And management and directors of Providian are similarly biased by an option incentive plan that is based on now-discredited concepts of alignment with shareholder interests."

Mr. Lutin has written to Mr. Saunders, asking Providian to cooperate with an objective analyst who will be hired to make an independent assessment of the deal. Mr. Elias said the company would probably not do so. Mr. King, of Putnam Investments, said he favored such an analysis, especially because it would help small investors who don't have the resources to scrutinize a deal.

Taking a vocal stance against a merger is unusual for Putnam, but Mr. King says it will probably take similar actions whenever its analysts conclude that prices proposed in takeovers are too low. "This is an extension of a direction we've been going in for some time," he said.

LET'S hope that other investors, large and small, join in to reject the deal. After all, because the premium in the takeover is so small, Providian shareholders have little downside if it fails. The upsides, meanwhile, are evident: a possibly higher price for the company from another bidder or a rising stock price based on the company's improving fundamentals.

"If investors want to get their fair share of capitalism's benefits," Mr. Lutin said, "they need to make better use of their rights."

Money Lost , Profits or Paradise

ON Feb. 24, Ronald S. Kochman hurried out of the elevator onto the 17th floor of an office tower in West Palm Beach, Fla., that KL Group, a hedge fund advisory firm, called home. Normally bustling with activity, the place was eerily quiet that morning as Mr. Kochman strode past the elegant conference rooms toward his destination: the corner office of Won Sok Lee, one of the firm's principals.

Two days earlier, Securities and Exchange Commission officials had unexpectedly visited KL's offices, demanding to see documents. Now some employees were reporting that Mr. Lee was missing - along with nearly all the money in the firm's accounts.

Mr. Kochman, a prominent trust and estate lawyer in the Palm Beach area, had much to lose. Not only had he sunk his savings, about $4 million, into the funds, but he had also put his reputation on the line by urging his own clients to invest with KL, where he had become a principal early last year. So when someone with keys to Mr. Lee's office asked him why he wanted to go in that morning, a tearful Mr. Kochman collapsed on his knees and said, "It's gone. It's all gone," according to a person who witnessed the event. "The money is missing and Won has jumped ship."

Today, the S.E.C., the Justice Department and a court-appointed receiver are still trying to unravel what happened. Investigators now say they believe that more than $200 million of investors' money has vanished, possibly making this one of the largest hedge fund frauds ever. In March, the S.E.C. sued Mr. Lee and two brothers, John and Yung Bae Kim, accusing them of securities fraud.

While the funds' managers blinded investors with records showing supposedly dazzling returns, the money was actually being frittered away in bad trades or simply stolen, according to the court-appointed receiver, the law firm Lewis Tein. Mr. Lee and Yung Kim have disappeared, and John Kim, who is cooperating with the investigation, denies any knowledge of wrongdoing.

"These guys were slick. They would have given Barnum & Bailey a run for their money," said Guy A. Lewis, a partner at Lewis Tein and a former United States attorney for the Southern District of Florida who, in the early 1990's, helped to prosecute Gen. Manuel Antonio Noriega of Panama. "This wasn't just a straight fraud. It was hocus-pocus, smoke and mirrors."

THIS much is known: Three years ago, Mr. Lee and the Kim brothers opened a hedge fund advisory business in Palm Beach, one of the nation's wealthiest enclaves. Driving flashy cars and living lavish lifestyles, the three principals - all Korean-born Americans in their mid-30's - befriended the right people, who provided them with access to society functions and introductions to their wealthy clients.

The aura of success and exclusivity around the firm was so strong that investors often begged to be let into its funds, some of which were said to have astounding annualized returns of 125 percent for several years. Among the funds' 225 investors were some of Palm Beach's elite, including Jerome Fisher, the founder of the Nine West shoe store chain; Carlos Morrison, an heir to the Fisher Body automotive fortune; and golf pros Nick Price and Raymond Floyd, according to people who have seen lists of investors.

While Palm Beach is still abuzz about the collapse of KL, few investors want to acknowledge that they were caught up in the frenzy. Donald J. Trump, who owns several properties in the area, said in an interview that he had been contacted about investing in the fund but didn't because he thought the returns were too good to be true. "These guys duped a lot of people down in Palm Beach, smart people with lots of money," Mr. Trump said. "These people feel they were conned, and they're embarrassed. They just don't want to talk about it."

The investigation has been hampered by a web of more than 30 domestic bank accounts - and more overseas - where money was moved around quickly. Individual, hedge fund and proprietary trading accounts were intermingled at the firm, and false bank statements were rampant, according to the receiver.

"There has been a tremendous amount of money lost," said Scott A. Masel, the S.E.C.'s head counsel in Miami investigating KL. "We might be looking at something akin to a Ponzi scheme, but the records make it difficult to pin down exactly what happened here."

What's clear is that scores of well-heeled investors missed signs that things were not quite right at KL. It turns out, for example, that the fund's principals had little experience in the securities industry. And there was never a formal independent audit to verify whether the remarkable returns reported by the funds were real.

"Even if the guy running the hedge fund has a sterling 20-year reputation on Wall Street, a sophisticated investor who's going to put $20 million in that fund wants to see those safeguards in place," said Lewis N. Brown, the counsel for a Palm Beach accounting firm that performed some accounting services for one of the smaller KL hedge funds. "That didn't happen here."

THE story of KL starts in a San Francisco apartment in the late 1990's, where John Kim and Mr. Lee were caught up in a major fad: day-trading of technology stocks. From what can be pieced together about their background through public records and interviews with former colleagues, the two had virtually no experience trading stocks. (Calls to Mr. Kim's lawyers were not returned. Yung Kim and Mr. Lee could not be reached.)

Mr. Lee grew up in Las Vegas - where his father now works as a marketing executive at the Bellagio Hotel and Casino - and earned a law degree at Tulane University in 1996. He worked as an associate in the gambling department at a Las Vegas law firm, and, in the late 1990's, in the tax department at a San Diego law firm.

John Kim and Yung Kim grew up in a Virginia suburb of Washington. John, who is also known as Jung Kim and is the older of the two, told colleagues that he had graduated from George Washington University and then operated a coffee importing business in South Korea, but that the government took it away and deported him because it was so successful.

Mr. Kim bragged to others that he had a vast Wall Street background, often evoking his time in the mergers and acquisitions department at Merrill Lynch, according to former colleagues. (Merrill Lynch said it had no records that Mr. Kim had ever worked there.) The NASD, a regulator that licenses securities professionals, says it has no records that any of the firm's original three principals had the necessary licenses to trade stocks for clients, which a Wall Street brokerage firm would require. Such licenses, however, are not needed to run a hedge fund.

Whatever their credentials, Mr. Kim and Mr. Lee rode the tech boom, reporting strong returns to friends and associates. Soon they began attracting outside investors. Eventually, they moved their operation to an office in Irvine, Calif., where they hired a number of young, fairly inexperienced people to trade the principals' own money, or proprietary accounts, while Mr. Kim focused on trading clients' and hedge fund assets. Mr. Lee handled back-office duties and Yung Kim served as the firm's chief financial officer.

In August 2002, John Kim and a childhood friend, Rob Melley, decided to open an East Coast branch of KL in the Palm Beach area. But within a couple of months, the two friends had a falling-out after Mr. Kim became frustrated over what he felt was the slow pace of the Palm Beach expansion, according to a former employee who did not want to be identified because of continuing investigations.

Mr. Melley walked away from the venture, although his father, James, who was also very close to Mr. Kim, remained a KL investor, according to the former employee. Calls to Rob Melley's residence and to James Melley's lawyers were not returned. Through James Melley, Mr. Kim and his partners met the man who would play a crucial role in giving them entry to the Palm Beach scene: Ronald Kochman.

Since the late 1990's, Mr. Kochman had built a lucrative trusts-and-estates practice, counting a number of Palm Beach's movers and shakers as clients. "Kochman had one of the pre-eminent practices down here," said Richard Rampell, an accountant who worked with Mr. Kochman on several occasions. "In the last couple of years, he probated two estates that were well into nine or even 10 figures. He was the envy of a lot of lawyers."

Mr. Kochman would not comment for this article. According to investigators and KL employees, Mr. Kochman became increasingly involved with the firm and formed a close friendship with Mr. Kim, who made him one of its principals. Mr. Kochman, these people said, believed that there were greater riches to be reaped if KL were sold to a large Wall Street firm, as Mr. Kim indicated it eventually would be. They said Mr. Kochman planned to downsize his trusts-and-estates business in order to play an even bigger role at KL.

Trusting his new friends, Mr. Kochman provided introductions to his clients and friends and was responsible for bringing in many of KL's investors, according to investigators.

His role has now become a focal point among investigators and lawyers representing some of the clients that he put into the fund. Gary Klein, a former S.E.C. branch chief whose firm, Klein & Sallah, represents 65 investors who lost at least $90 million in KL, said that a number of them were also clients of Mr. Kochman's law practice. "That was clearly a breach of fiduciary duty if Kochman was a principal at KL and didn't disclose it," Mr. Klein said.

Mr. Kochman's lawyer would not comment on whether his client had recommended his own clients to the fund. "I think Mr. Kochman believed that there might be a future for him" at KL, said his lawyer, Morris Weinberg Jr. "This looked like a wonderful opportunity that, obviously, didn't work out."

NOT that it was all that difficult for KL to persuade investors to jump into the funds with both feet. Its main fund reported strong returns of 70 percent in 2003 and 40 percent in 2004, according to statements given to investors. The lifestyle of the funds' original three principals also supported the picture of a business doing well. The young men drove flashy cars: Maseratis, Porsche 911's and Mercedes SL 500's. (The firm's personal masseuse drove a Jaguar X-Type that was provided by KL.) End-of-year holiday parties were held in Las Vegas, where Mr. Kim and Mr. Lee were high-rolling VIP's at several casinos.

The crown jewel was KL's luxurious offices in the new Esperante building in downtown West Palm Beach. The large sunlit offices were filled with gorgeous desks designed by Dakota Jackson and a conference table that had to be hoisted 17 floors through the building's elevator shaft. Some walls were covered in a gray suede fabric, and in the corner of Mr. Kim's office was a $6,000 massage chair. The trading floor had large flat-panel televisions scattered throughout.

It all was a great way to impress clients, who were ushered in to watch the main attraction: Mr. Kim. From his captain's chair, he traded frenetically, surrounded by 20 computer screens.

But like so many things at KL, not all was what it seemed. There were, for instance, the many faces of Mr. Kim himself. To KL's investors, he was charismatic and respectful. Several older men who invested in the fund are said by former employees to have treated him like a son. Inside KL, though, Mr. Kim's moods swung sharply. At times, he was extremely patient and friendly with the young traders, going to their homes for poker games. Some employees, however, describe Mr. Kim as an egotistical bully who would have fits of rage.

And Mr. Kim may not have been as successful an investor as he wanted people to believe. In fact, a former KL trader said that Mr. Kim did not make any money at all in his trading activities. In KL offering letters, Mr. Kim claimed to have developed a proprietary technical analysis system called "SmartCharts" that involved short-selling stocks that were making highs in the market - betting that those stocks would lose value.

"Essentially, John was constantly trading against the trend," recalled the trader, who also did not want to be identified because of his involvement in continuing regulatory investigations. "The strongest stocks in the fall of 2004 were stocks he was selling short." Those shorted stocks included those of eBay, Yahoo and Research in Motion, the maker of the BlackBerry wireless device, this trader said.

The trader said Mr. Kim often traded ahead of a company's quarterly earnings report - a bet on whether the company would miss, meet or beat Wall Street's expectations.

The firm's proprietary traders weren't faring very well, either. A majority of the young, inexperienced traders were not making enough money from their bets in the market to earn a commission. Instead, they were receiving a $1,500 draw each month that they were expected to pay back, according to the receiver.

Based on the receiver's investigation so far, it appears that any trading profits the firm recorded during 2003 or 2004 were promptly stolen by the defendants in the securities fraud case, according to Michael R. Tein, a former federal prosecutor who is now a partner at Lewis Tein. As losses mounted late last year, the house of cards holding up KL began to collapse.

Last fall, a number of investors started to clamor for an independent audit of KL's funds. "We told them, 'We have to have audits done on this thing,' " said a person who invested in one of KL's funds in early 2004 but did not want to be identified because he did not want to be associated with the scandal. "They kept promising they would do it, but kept putting it off." The investor said he was even offered "big incentives" in a meeting late last year with John Kim and Mr. Kochman to bring in new investors. "I told them when you give me a confirmed, certified audit, I'll consider doing something for you," the investor said.

Certain investors who were receiving daily and weekly updates on the performance of KL's funds realized that they were starting to lose money. Between the losses and the lack of a certified audit, at least two large KL investors filled out withdrawal slips so that they could remove about $10 million from the funds by the end of the year, according to a former employee.

Fearing that investors would redeem more money from the funds - money the funds may not have had, according to investigators - the firm's principals raced to stop the outflows. One of their biggest investors who was ready to bolt late last year was a local eye surgeon, Dr. Salomon E. Melgen.

By last fall, Dr. Melgen intended to withdraw some of the $12.3 million investment that he and a holding company he controlled had already given to John Kim to manage, according to a lawsuit he filed against the advisory firm and its principals. (Mr. Melgen's lawyer said he would not comment for this article.) Instead, in October, John Kim and Mr. Lee signed a document that guaranteed that Dr. Melgen's $12.3 million would be repaid at the end of January 2005, according to the document. The money was to be set aside in a separate account and traded only by John Kim.

Dr. Melgen had invested an additional $7 million in one of KL's funds and put $1 million in a separate account under an agreement that would allow Mr. Kim to use an airplane owned by Dr. Melgen. Within four months of Dr. Melgen's receiving the signed guarantee, his $20 million investment had disappeared, according to the lawsuit.

In late February, regulators from the S.E.C. entered KL's California and Palm Beach offices simultaneously, demanding to see documents. Mr. Kim avoided the regulators in West Palm Beach, saying he couldn't be bothered during trading hours, a former employee said. In California, though, regulators met with both Mr. Lee and Yung Kim, S.E.C. documents show. After the meeting, investigators said, Mr. Lee walked out of the office, leaving a half-eaten bag of cookies on his desk. The next morning he went to the airport and bought a one-way ticket for South Korea, using frequent-flier miles, the investigators said. The day after that, Yung Kim disappeared as well.

A few days after the S.E.C. appeared on KL's doorstep, John Kim invited about 30 employees to his home. As the employees listened in shock, he said that the company was under investigation and that his brother and Mr. Lee were missing. He said nothing about missing funds. "John put his arms around me, apologized profusely about what was happening and told me he didn't know anything," said Al Farinelli, the firm's controller. "He said his brother was responsible for everything."

John Kim's assets have been frozen by the S.E.C., but he agreed to cooperate with investigators in exchange for being granted access to enough money to pay for eye surgery for his young daughter earlier this year, according to the S.E.C.

Mr. Kim has said that, based on his knowledge of his own trading activity, the hedge fund was profitable, according to testimony he provided to regulators in March. If losses did occur, he said, he had no idea whether they were a result of trading screens that had been doctored, or if Mr. Lee and Yung Kim had lost any profits in their own trading activities.

Some KL investors say they believe him. "I think John Kim is a victim in all of this. So is Ron Kochman," said a female investor who didn't want to be identified but who was friendly with Mr. Kim and his family as well as with Mr. Lee. When asked if she held Mr. Kim responsible for losses she incurred, the investor said, "I'm the only one responsible for deciding to be in the fund." LAWYERS at Lewis Tein said they had fielded calls from investors who were eager to give Mr. Kim money again because they believed he could make it back for them.

But several people who once called Mr. Kim a friend said they are skeptical of Mr. Kim's claims. "We're reviewing documents, e-mails and trading records and some of what we've seen so far may not support Mr. Kim's position," said David B. Rosemberg, a lawyer at Lewis Tein. Other people said they were bothered by a last-minute trip that Mr. Kim made to South Korea in December, when he bought a $650,000 home in Seoul.

Furthermore, the S.E.C. said this spring that at least $20 million of investor funds were diverted for the personal use of KL's principals, including Mr. Kim. Investigators said they believe that the fancy cars and even some of Mr. Kim's mortgage payments came directly from KL's coffers.

Will the whole story of KL ever be known? Investigators are poring over documents and statements, trying to put together what happened, but that will take months, and even then a clear picture may not emerge. As for the millions lost by investors, it is unlikely that much will be recouped, according to lawyers involved in the case.

But people searching for a bigger lesson from the story of KL might find it in a sign at the firm's opulent West Palm Beach offices. It lists KL's 36 trading principles. No. 26? Greed kills.

Disney Chief To plan Companies Transformation

LOS ANGELES, Aug. 14 - Robert A. Iger does not officially get the keys to the Disney castle for another six weeks, but he is already well along with his restoration plan.

Mr. Iger, the 54-year-old president of the Walt Disney Company, becomes chief executive on Oct. 1 as the handpicked successor to Michael D. Eisner, who ran the corporation with skillful determination for 21 years but has more recently reigned over a troubled kingdom.

When a Delaware judge last week upheld Disney's $140 million severance package granted to Michael S. Ovitz in 1996, after only 14 months as president, it closed one of the last pieces of unfinished, unflattering business from the Eisner era.

Mr. Iger, though, has not been waiting for judges or anyone else to fix problems that festered on Mr. Eisner's watch.

In March, less than two weeks after the board approved his nomination to become chief executive, Mr. Iger dismantled the company's corporate strategic planning group, giving the heads of the film, television, theme park and other divisions the freedom they had long sought to run their own businesses.

In April Mr. Iger traveled to Northern California to sit down with Steven P. Jobs, the chief executive of Pixar Animation Studios, whose years of feuding with Mr. Eisner had threatened the future of the companies' mutually lucrative movie distribution partnership.

And in July Mr. Iger negotiated a truce with Roy E. Disney, a dissident former board member and nephew of Walt Disney, who helped lead a shareholder uprising last year that diminished Mr. Eisner's power and led in part to his decision to retire.

"If anyone had a list of things for Bob to do right away it would be these; figuring out the Roy thing and, at the end of the day, seeing that Pixar and Disney should be partners," said Lawrence J. Haverty, associate portfolio manager of the Gabelli Global Multimedia Trust and an investor in Disney stock. "What Bob has to do now is execute the obvious, brilliantly."

For his part, Mr. Iger, who has been Disney president for five years, credits Mr. Eisner for letting him start exercising the prerogatives of chief executive even before holding the job. "Not only did he stand down and get out of the way, but he supported me all along," said Mr. Iger in an interview late Friday night. "Michael has been exceptional in how he handled this transition."

Only a year ago, few in Hollywood or on Wall Street considered Mr. Iger the right man to succeed Mr. Eisner. The main criticism was that he lacked the corporate gravitas to lead Disney, despite having been the heir apparent at Capital Cities/ABC when Disney bought it in 1996.

But his accomplishments in corporate diplomacy in recent months are quieting such criticism. So is the company's financial resurgence, spurred in part by the revival of the ABC television network; Mr. Iger said a few years ago that he was taking personal responsibility for fixing that business.

On the strength of new hit shows like "Desperate Housewives" and "Lost," ABC's operating income surged in the quarterly results announced last week, when Disney reported an overall gain of 41 percent in profit for its fiscal third quarter, to $851 million, on revenue of $7.72 billion.

Many had assumed, even feared, that Mr. Eisner would not cede power easily after two decades. Mr. Eisner became Disney's chairman and chief executive at age 42 after being passed over for the chairmanship of Paramount Pictures. Under him, Disney resurrected its animation business, extended its reach into cable television and onto Broadway and grew to about 117,000 employees worldwide from 28,000.

But in the mid-1990's, the stock price and profits slumped. Disney made expensive acquisitions, including the ABC Family channel and the ABC television network, which was a money-loser for years. And Mr. Eisner was criticized for alienating top executives, most notably Jeffrey Katzenberg, who angrily departed in 1994 after overseeing a string of animated hits like "Beauty and the Beast," "Aladdin" and "The Lion King."

There was also the debacle with Mr. Ovitz, the powerful Hollywood talent agent in whom Mr. Eisner lost confidence only months after hiring him as president. In more recent years, shareholders lost confidence in Mr. Eisner.

But to the surprise of his detractors, Mr. Eisner has given Mr. Iger considerable leeway. "I wanted Bob to get on with it and start running the company as soon as possible," Mr. Eisner said in an interview on Saturday. "I'm glad the unnecessary distractions are over."

One distraction, still not fully resolved, is Disney's fractured relationship with Pixar, the maker of "Toy Story" and "Finding Nemo."

Last year, after a standoff lasting for months between Mr. Jobs and Mr. Eisner, Pixar said it would end talks on continuing its 14-year partnership with Disney and seek another studio to distribute its films in 2006.

Disney did not like the terms Pixar was demanding, but there was also unresolved tension over whether Pixar sequels could count toward the number of movies Disney was owed under the existing agreement. (Mr. Jobs wanted them to count, while Mr. Eisner said they would not.)

On April 8, Mr. Iger flew to Pixar headquarters in Emeryville, Calif., where he met the company's animators, toured the office and had lunch with Mr. Jobs. He followed up with a second visit in May. "I wanted to make the connection myself," Mr. Iger said. "I hadn't had one."

Since then, Mr. Jobs's anti-Disney rhetoric has softened and he has praised Mr. Iger during Pixar's earnings conference calls. Most important, the two have resumed talks about a potential deal, with Mr. Jobs saying he wants to name a distribution partner - Disney or not - by the end of the year.

"The one thing I know about Bob and Steve, they will do what's best for their companies," Mr. Eisner said. "Look, divorce is never good for the children. It's good for these companies to be having talks."

There was another Eisner feud that Mr. Iger needed to address. For two years, Mr. Disney and another former board member, Stanley P. Gold, had publicly complained about what they considered Mr. Eisner's autocratic management style. In 2004 the two rallied shareholders to revolt against Mr. Eisner, resulting in his being stripped of his chairman's title. Disney, like a growing number of companies, now has a nonexecutive chairman, George J. Mitchell, a former United States senator, who said he would resign next year.

The Disney-Gold revolt also led in part to Mr. Eisner's decision not to seek an extension of his contract after it expires in September.

But the battle had been costly for both sides. Mr. Disney and his family spent tens of millions of dollars on the fight. And it took a heavy toll on Disney's executive team, which was distracted from running the company. So on May 6, Mr. Iger met Mr. Disney for an awkward lunch in a Burbank restaurant, according to three people who were apprised of the discussions but declined to be named, citing the sensitive nature of the talks. Mr. Disney declined to comment for this article.

Mr. Iger, citing a confidentiality agreement, declined to discuss the lunch except to say: "Roy called me first. I was motivated on behalf of the company to settle the differences."

Nothing was resolved. Instead, the next Monday, Mr. Disney and Mr. Gold filed a lawsuit in Delaware Chancery Court, demanding that the most recent Disney board election be voided and contending that the board did not conduct a thorough search for Mr. Eisner's successor when it gave Mr. Iger the job. Mr. Iger was upset, said two of the three people who were briefed on the meeting. And some investors questioned why Mr. Disney and Mr. Gold would sue, given that their unhappiness was largely with the departing Mr. Eisner.

The company's relations with the former directors remained frosty - so much so that Mr. Disney was not sent an invitation to the 50th anniversary celebration of Disneyland on July 17, according to two of the people.

In early June the Delaware judge allowed the case to proceed. By now, though, neither side was thrilled at the prospect of another legal fight. So Mr. Iger and Mr. Disney met again. After weeks of negotiations the two sides announced a truce on July 11.

Mr. Disney and Mr. Gold agreed to drop their lawsuit. In return, Mr. Disney was given the largely ceremonial title of director emeritus, with no voting power or board responsibilities, and allowed to serve as a consultant.

Mr. Iger said he had been worried that negotiating with Mr. Disney "would be disrespectful to Michael." Instead, Mr. Eisner "helped make it happen," Mr. Iger said.

"He didn't allow his personal feeling or the perception that 'he couldn't get it done and I could' get in the way," Mr. Iger said. "If it was settled, my tenure as C.E.O. would be better."

Mr. Iger's success, of course, will be gauged by more than how well he rebuilds Mr. Eisner's broken bridges. Now he will be judged on how well he handles other important issues, such as ensuring that the ABC network continues its successful rebound, expanding Disney's international operations and rebuilding the in-house animation business.

"Strong future performance is dependent on Mr. Iger's ability to be a head coach rather than a star player," the Morgan Stanley media analyst Richard Bilotti wrote in a research report after Mr. Iger was named to the chief executive's post. "The complexity of realizing growth from media assets, an issue faced by all media conglomerates, is the more daunting task."

In the last several months Mr. Iger has traveled several times to Asia - including China, India, Vietnam and Hong Kong. Asia is a top priority for Disney. The company is set to open its newest park, Hong Kong Disneyland, on Sept. 12, and Mr. Iger sees the entire region as one of Disney's main growth opportunities.

More than a year ago Disney's consumer products division began to open small boutiques within Chinese department stores to promote and sell its popular Princess line of dolls, costumes and toys. And just last week Disney announced that "Desperate Housewives" would be carried in China this fall.

The greater challenge for Mr. Iger may be reviving Disney's animation business, which has ceded the field it long dominated to DreamWorks Animation and Pixar. This fall Disney will release "Chicken Little," the first market test of the talents of Disney's newly renovated computer animation division.

But after months of diplomatic damage control, Mr. Iger seems more than happy to concentrate on the company's creative challenges. "With some of these things resolved," he said, "we can now focus on the internal issues."